CEIC News@lert: Changes to UK National Accounts Methodology Boosts Savings

July 2, 2014 - CEIC Global Database OVERVIEW The UK’s Office for National Statistics (ONS) will adopt the European System of National Accounts, or ESA2010, starting from the third quarter of 2014. Among the areas affected by the adoption would be the recognition of research and development activities, exported goods sent for processing, insurance and pensions. Of interest, the treatment of pensions may have huge ramifications for the UK’s savings ratio – i.e. savings as a percentage of disposable income. Under ESA95 (hitherto the standard system), unfunded pension obligations may neither be recognised as a liability of the pension scheme nor the financial asset of the potential beneficiaries. At the same time, social insurance schemes are not distinct from the employers (either private or public); pension payouts are typically deemed as transactions between the employer (either private or public sector) and the household sector. In contrast, the new method measures pension liabilities on an actuarial basis, recognising pensions as an entitlement of employees. This is regardless of its funded status, taking into account accrued-to-date pension entitlements under social insurance schemes, reflecting household wealth from pension entitlement. Under the new computation, pension benefits will be based on salary, number of years’ pensionable service and the accrual rate, representing accrued pension benefits. The new national accounting system thus attempts to factor into GDP the current benefits received from accrued pension payments to be paid out in the future (including projected wage growth). In the ESA 2010 computation, the output of pension schemes is equal to the Service Charge recorded in the Secondary Distribution of Income Account. The effect of the new treatment is minimal since other transactions used in the calculation of GDP are not affected. In Public Sector Net Borrowing (PNSB), due to the classification of Local Government (LG) as the pension manager of the Local Government Pension Scheme (LGPS), the Employers’ Imputed Social Contributions are recorded as a use of LG in the Generation of Income Account. This is a new transaction relating to the LGPS as a funded defined benefit scheme, and feeds into the calculation of the PNSB. Other indicators affected will be the net worth and net lending/borrowing of LG along with Public Non-Financial Corporations (PNFC), Financial Corporations (FC), Non-Profit Institutions Serving Households (NPISH) and Households. The new system will affect greatly the saving process through a variety of stages. First, in the Allocation of Primary Income Account, the employers pay the Social Contribution (both actual and imputed) to the pension scheme. The households will receive investment income generated by the pension Scheme. Second, in the Secondary Distribution of Income Account, households pay employers’ contribution (actual and imputed), households’ actual contributions and households’ social contribution supplements less a service charge into the pension scheme. In return, households receive social benefits from the pension. This will result in countervailing effects on Household Gross Disposable Income: decreasing (due to contributions paid) and increasing (due to benefits disbursed). Third, in the Use of Income Account, the Adjustment for the Change in Pension Entitlements will reverse the transactions in the Secondary Distribution of Income Account. All contributions will be added to Households’ resources with all benefits subtracted. The contributions will be taken as Gross Saving because paying a pension is very much like other forms of saving that are setting aside a portion of income for the future. For almost two decades to mid-2008, the UK savings ratio was on a decreasing trend. Modest growth in real household disposable income during 2008 coincided with a short-lived spike in saving, although higher household expenditure post-2009 has seen the savings ratio grow at a more moderate pace. While the pension-specific impact on the national accounts is uncertain, estimates by Eurostat put the total impact of the ESA 2010 changes at an additional 3% to the UK’s Gross Domestic Product (as pension entitlements, funded or otherwise, are recognised as part of GDP). Given the minimal impact of this presentational change on consumption expenditure, the pension changes are likely to increase Gross Savings – the ONS projects that the household saving ratio could increase by as much as 3.4 to 6.3 percentage points as a result of these changes. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
2nd July 2014 CEIC News@lert: Changes to UK National Accounts Methodology Boosts Savings